10-Q 1 hubs-10q_20180331.htm 10-Q hubs-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                       TO                     

COMMISSION FILE NUMBER 001-36680

 

HubSpot, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2632791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25 First Street, 2nd Floor

Cambridge, Massachusetts, 02141

(Address of principal executive offices)

(888) 482-7768

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    YES      NO  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

There were 38,409,346 shares of the registrant’s Common Stock issued and outstanding as of April 30, 2018.

 

 

 

 

 


 

HUBSPOT, INC.

Table of Contents

 

Part I — Financial Information

 

 

 

 

Item 1.

 

Unaudited Consolidated Financial Statements:

 

 

 

Unaudited Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

5

 

 

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

6

 

 

Unaudited Consolidated Statements of Comprehensive Loss for the Three Months ended March 31, 2018 and 2017

7

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

8

 

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

 

Controls and Procedures

30

 

Part II — Other Information

 

 

 

 

Item 1.

 

Legal Proceedings

31

Item 1A.

 

Risk Factors

31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

 

Default Upon Senior Securities

50

Item 4.

 

Mine Safety Disclosures

50

Item 5.

 

Other Information

50

Item 6.

 

Exhibits

51

Signatures

 

 

 

EX-31.1

 

CERTIFICATION OF THE CEO PURSUANT TO SECTION 302

 

EX-31.2

 

CERTIFICATION OF THE CFO PURSUANT TO SECTION 302

 

EX-32.1

 

CERTIFICATION OF THE CEO AND CFO PURSUANT TO SECTION 906

 

 

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and these statements involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross margin and operating expenses;

 

maintaining and expanding our customer base and increasing our average subscription revenue per customer;

 

the impact of competition in our industry and innovation by our competitors;

 

our anticipated growth and expectations regarding our ability to manage our future growth;

 

our anticipated areas of investments, including sales and marketing, research and development, customer service and support, data center infrastructure and service capabilities, and expectations relating to such investments;

 

our predictions about industry and market trends;

 

our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll-out upgrades to our existing software platform and to develop new and enhanced applications to meet the needs of our customers;

 

our ability to maintain our brand and inbound marketing thought leadership position;

 

the impact of our corporate culture and our ability to attract, hire and retain necessary qualified employees to expand our operations;

 

the anticipated effect on our business of litigation to which we are or may become a party;

 

our ability to successfully acquire and integrate companies and assets;

 

the U.S. federal tax consequences due to dividends received as part of the move to a territorial tax system for foreign subsidiary earnings;

 

our plans regarding declaring or paying cash dividends in the foreseeable future; and

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

3


 

In this Quarterly Report on Form 10-Q, the terms “HubSpot,” “we,” “us,” and “our” refer to HubSpot, Inc. and its subsidiaries, unless the context indicates otherwise.

4


 

PART I — Financial Information

 

 

Item 1.

Financial Statements

HubSpot, Inc.

Unaudited Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

154,031

 

 

$

87,680

 

Short-term investments

 

 

375,379

 

 

 

416,663

 

Accounts receivable — net of allowance for doubtful accounts of $577 and $617

   at March 31, 2018 and December 31, 2017, respectively

 

 

54,208

 

 

 

60,676

 

Deferred commission expense

 

 

12,721

 

 

 

13,343

 

Restricted cash

 

 

5,968

 

 

 

4,757

 

Prepaid hosting costs

 

 

1,648

 

 

 

4,964

 

Prepaid expenses and other current assets

 

 

15,588

 

 

 

14,418

 

Total current assets

 

 

619,543

 

 

 

602,501

 

Long-term investments

 

 

28,100

 

 

 

31,394

 

Property and equipment, net

 

 

47,734

 

 

 

43,294

 

Capitalized software development costs, net

 

 

9,885

 

 

 

8,760

 

Deferred commission expense, net of current portion

 

 

11,228

 

 

 

 

Other assets

 

 

5,273

 

 

 

4,964

 

Intangible assets, net

 

 

6,262

 

 

 

6,312

 

Goodwill

 

 

14,950

 

 

 

14,950

 

Total assets

 

$

742,975

 

 

$

712,175

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,194

 

 

$

4,657

 

Accrued compensation costs

 

 

14,680

 

 

 

16,329

 

Other accrued expenses

 

 

23,996

 

 

 

20,430

 

Deferred revenue

 

 

148,500

 

 

 

136,880

 

Total current liabilities

 

 

192,370

 

 

 

178,296

 

Deferred rent, net of current portion

 

 

19,646

 

 

 

18,868

 

Deferred revenue, net of current portion

 

 

2,284

 

 

 

2,277

 

Other long-term liabilities

 

 

4,222

 

 

 

3,927

 

Convertible senior notes

 

 

303,355

 

 

 

298,447

 

Total liabilities

 

 

521,877

 

 

 

501,815

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

39

 

 

 

38

 

Additional paid-in capital

 

 

516,934

 

 

 

496,461

 

Accumulated other comprehensive loss

 

 

(138

)

 

 

(57

)

Accumulated deficit

 

 

(295,737

)

 

 

(286,082

)

Total stockholders’ equity

 

 

221,098

 

 

 

210,360

 

Total liabilities and stockholders’ equity

 

$

742,975

 

 

$

712,175

 

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

HubSpot, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

Subscription

 

$

108,602

 

 

$

77,503

 

Professional services and other

 

 

5,954

 

 

 

4,749

 

Total revenue

 

 

114,556

 

 

 

82,252

 

Cost of revenues:

 

 

 

 

 

 

 

 

Subscription

 

 

15,235

 

 

 

11,409

 

Professional services and other

 

 

7,142

 

 

 

5,663

 

Total cost of revenues

 

 

22,377

 

 

 

17,072

 

Gross profit

 

 

92,179

 

 

 

65,180

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

26,352

 

 

 

13,370

 

Sales and marketing

 

 

59,910

 

 

 

46,672

 

General and administrative

 

 

17,241

 

 

 

13,138

 

Total operating expenses

 

 

103,503

 

 

 

73,180

 

Loss from operations

 

 

(11,324

)

 

 

(8,000

)

Other (expense) income:

 

 

 

 

 

 

 

 

Interest income

 

 

1,824

 

 

 

303

 

Interest expense

 

 

(5,174

)

 

 

(52

)

Other expense

 

 

(283

)

 

 

(128

)

Total other (expense) income

 

 

(3,633

)

 

 

123

 

Loss before income tax expense

 

 

(14,957

)

 

 

(7,877

)

Income tax expense

 

 

(491

)

 

 

(198

)

Net loss

 

$

(15,448

)

 

$

(8,075

)

Net loss per share, basic and diluted

 

$

(0.41

)

 

$

(0.22

)

Weighted average common shares used in computing basic

   and diluted net loss per share:

 

 

37,832

 

 

 

36,205

 

 

The accompanying notes are an integral part of the consolidated financial statements.

6


 

HubSpot, Inc.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(15,448

)

 

$

(8,075

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

298

 

 

 

121

 

Changes in unrealized loss on investments, net of income taxes of $0 for the three months ended March 31, 2018 and $18 for the three months ended March 31, 2017

 

 

(379

)

 

 

35

 

Comprehensive loss

 

$

(15,529

)

 

$

(7,919

)

 

The accompanying notes are an integral part of the consolidated financial statements.

7


 

HubSpot, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,448

)

 

$

(8,075

)

Adjustments to reconcile net loss to net cash and cash equivalents provided

   by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,110

 

 

 

3,329

 

Stock-based compensation

 

 

16,046

 

 

 

9,303

 

Benefit for deferred income taxes

 

 

 

 

 

(27

)

Amortization of debt discount and issuance costs

 

 

4,908

 

 

 

 

(Accretion) amortization of bond discount premium

 

 

(1,164

)

 

 

77

 

Noncash rent expense

 

 

794

 

 

 

1,667

 

Unrealized currency translation

 

 

36

 

 

 

(46

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,863

 

 

 

4,176

 

Prepaid expenses and other assets

 

 

1,880

 

 

 

1,061

 

Deferred commission expense

 

 

(5,068

)

 

 

(464

)

Accounts payable

 

 

166

 

 

 

(1,250

)

Accrued expenses

 

 

1,674

 

 

 

922

 

Deferred rent

 

 

(48

)

 

 

(34

)

Deferred revenue

 

 

10,973

 

 

 

8,453

 

Net cash and cash equivalents provided by operating activities

 

 

26,722

 

 

 

19,092

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(210,886

)

 

 

(16,367

)

Maturities of investments

 

 

256,250

 

 

 

15,860

 

Purchases of property and equipment

 

 

(6,239

)

 

 

(5,835

)

Capitalization of software development costs

 

 

(2,616

)

 

 

(1,610

)

Purchases of strategic investments

 

 

(250

)

 

 

 

Net cash and cash equivalents provided by (used in) investing activities

 

 

36,259

 

 

 

(7,952

)

Financing Activities:

 

 

 

 

 

 

 

 

Employee taxes paid related to the net share settlement of stock-based awards

 

 

(2,344

)

 

 

(1,153

)

Proceeds related to the issuance of common stock under stock plans

 

 

6,113

 

 

 

4,340

 

Repayments of capital lease obligations

 

 

(212

)

 

 

(240

)

Net cash and cash equivalents provided by financing activities

 

 

3,557

 

 

 

2,947

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

677

 

 

 

454

 

Net increase in cash, cash equivalents, and restricted cash

 

 

67,215

 

 

 

14,541

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

92,784

 

 

 

60,185

 

Cash, cash equivalents and restricted cash, end of period

 

$

159,999

 

 

$

74,726

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

15

 

 

$

192

 

Cash paid for income taxes

 

$

45

 

 

$

37

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired under capital lease

 

$

 

 

$

247

 

Capital expenditures incurred but not yet paid

 

$

1,382

 

 

$

1,525

 

Asset retirement obligations

 

$

101

 

 

$

 

 

The accompanying notes are an integral part of the consolidated financial statements.

8


 

HubSpot, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Organization and Operations

HubSpot, Inc. (the “Company”) provides a cloud-based inbound marketing, sales and customer service platform which features integrated applications to help businesses attract visitors to their websites, convert visitors into leads, close leads into customers and delight customers so they become promoters of those businesses. These integrated applications include social media, search engine optimization, blogging, website content management, marketing automation, email, sales productivity, CRM, analytics, reporting, helpdesk, chat, and knowledge base.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2017, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.   

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2018. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 13, 2018. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes, except the adoption of updated guidance related to revenue recognition and costs to obtain a contract with a customer as described within Note 2 of these consolidated financial statements.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. The Company does not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2016, the FASB issued guidance related to the presentation of restricted cash within the statement of cash flows. The guidance requires entities to show the changes in cash, cash equivalents, and restricted cash in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. The Company adopted the updated guidance as of January 1, 2018. As a result of adopting this guidance cash and cash equivalents provided by (used in) investing activities increased by $864 thousand and net increase in cash, cash equivalents, and restricted cash also increased by $864 thousand for the three months ended March 31, 2018. Cash and cash equivalent provided by (used in) investing activities increased by $4.4 million and net increase in cash, cash equivalents, and restricted cash increased by $4.5 million for the three months ended March 31, 2017 in the consolidated statements of cash flows.

In February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification

9


 

criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

In January 2016, the FASB issued guidance that requires entities to measure equity instruments at fair value and recognize changes in fair value within the statement of operations. The Company adopted the updated guidance as of January 1, 2018.  The guidance provides for electing a measurement alternative or defaulting to the fair value option for equity investments that do not have readily determinable fair values. The Company elected the measurement alternative for its equity investments in privately held companies, which are included in other assets in the accompanying consolidated balance sheets. These investments are measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which will be recorded within the statement of operations. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining customer contracts. The Company adopted the updated guidance as of January 1, 2018 using the modified retrospective transition method. See Note 2 of these consolidated financial statements for further details

 

2. Revenues

 

Adoption of Updated Revenue Guidance

 

On January 1, 2018, the Company adopted new revenue guidance using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic revenue guidance.  The Company applied the new standard using practical expedients where:

 

 

the measurement of the transaction price excludes all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer;

 

the new revenue guidance has been applied to portfolios of contracts with similar characteristics;

 

the modified retrospective approach has been applied only to contracts that are not completed contracts at the date of initial adoption; and

 

the value of unsatisfied performance obligations for contracts with an original expected length of one year or less has not been disclosed.

 

The impact of applying the new guidance in 2018 vs the prior guidance resulted in a change to the period over which sales commissions are amortized to incorporate an estimated customer life and the amortization period over which internally developed new features and increased functionality for our software platform is recorded, in addition to the initial contract period. This resulted in a longer amortization period for deferred commission expense, which reduces expense compared to the application of the prior guidance.  There was also a change to the scope of sales commissions that are capitalized based on the definition of incremental costs of obtaining a contract. This increased the amount of commissions cost that was capitalized compared to the application of the prior guidance. In addition, there was a change in the timing of revenue recognition for certain sales contracts where free or discounted services are bundled with subscription services due to the removal of the limitation on recording contingent revenue that existed in the prior guidance. Removing the limitation of recording contingent revenue resulted in an acceleration of revenue recognition on these contracts compared to the application of the prior guidance.

 

The Company recorded a net increase to opening retained earnings of $5.8 million as of January 1, 2018 due to the cumulative impact of adopting the new revenue guidance, with the impact primarily related to the recognition of costs associated with obtaining customer contracts. The resulting impact to the consolidated statements of operations and comprehensive loss of applying the new guidance in 2018 vs the prior guidance was a decrease to subscription revenue of $170 thousand, an increase to professional services and other revenue of $140 thousand, a decrease to total revenues of $30 thousand, and a decrease to selling and marketing expense and total operating expenses of $3.6 million for the three months ended March 31, 2018.  The resulting impact to loss from operations, loss before income tax (expense) benefit, net loss and comprehensive loss was $3.5 million.  The resulting impact on basic earnings per share was $0.09.  The resulting impact to the consolidated balance sheet of applying the new guidance in 2018 vs the prior guidance was a decrease to short-term deferred commissions and total current assets of $2.2 million, an increase to long-term deferred

10


 

commissions of $11.2 million, an increase in total assets of $9.0 million, a decrease to short-term deferred revenue, total current liabilities, and total liabilities of $300 thousand, a decrease to accumulated deficit and increase to total stockholders’ equity of $9.3 million, and an increase to total liabilities and stockholders’ equity of $9.0 million.  There was no impact to total cash flow from operations of applying the new guidance in 2018 vs the prior guidance because the decrease in net loss of $3.5 million, increase in the change in deferred commission expense of $3.6 million and decrease in the change in deferred revenue  of $30 thousand net to $0 within cash flows from operations.    

 

 

Revenue Recognition

 

The Company generates revenue from arrangements with multiple performance obligations, which typically include subscriptions to its online software products and professional services which include on-boarding and training services. The Company’s customers do not have the right to take possession of the online software products.  The Company recognizes revenue from contracts with customers using a five-step model, which is described below:

 

 

Identify the customer contract;

 

Identify performance obligations that are distinct;

 

Determine the transaction price;

 

Allocate the transaction price to the distinct performance obligations; and

 

Recognize revenue as the performance obligations are satisfied.

 

Identify the customer contract

A customer contract is generally identified when the Company and a customer have executed an arrangement that calls for the Company to grant access to its online software products and provide professional services in exchange for consideration from the customer.

Identify performance obligations that are distinct

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services.  A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.  The Company has determined that subscriptions for its online software products are distinct because, once a customer has access to the online software product that it purchased, the online software product is fully functional and does not require any additional development, modification, or customization.  Professional services sold are distinct because the customer benefits from the on-boarding and training to make better use of the online software products it purchased.

Determine the transaction price

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.  The Company estimates any variable consideration to which it will be entitled at contract inception, and reassesses at each reporting date, when determining the transaction price.  The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved.

Allocate the transaction price to the distinct performance obligations

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.  The Company determines the SSP of its goods and services based upon the average sales prices for each type of online software product and professional services sold.  In instances where there are not sufficient data points, or the selling prices for a particular online software product or professional service are disparate, the Company estimates the SSP using other observable inputs, such as similar products or services.

 

 

11


 

Recognize revenue as the performance obligations are satisfied

Revenues are recognized when or as control of the promised goods or services is transferred to customers.  Revenue from online software products is recognized ratably over the subscription period beginning on the date the Company’s online software products are made available to customers. Most subscription contracts are one year or less. The Company recognizes revenue from on-boarding and training services as the services are provided.

 

Disaggregation of Revenue

 

The Company provides disaggregation of revenue based on geographic region within the notes (Note 13) and based on the subscription vs professional services and other classification on the consolidated statements of operations as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Deferred Revenue and Deferred Commission Expense

 

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue.  Deferred revenue during the three months ended March 31, 2018 increased by $11.6 million resulting from $126.2 million of additional invoicing and was offset by revenue recognized of $114.6 million during the same period, of which $71.6 million was included in deferred revenue at the beginning of the period.  As of March 31, 2018, approximately $74.3 million of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year.  The Company expects to recognize revenue on approximately 90% of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.  

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts, are deferred and amortized on a straight-line basis over a period of approximately two to three years.  The two to three-year period has been determined by taking into consideration the type of product sold, the commitment term of the customer contract, the nature of the Company’s technology development life-cycle, and an estimated customer relationship period.  Sales commissions for upgrade contracts are deferred and amortized on a straight-line basis over the remaining estimated customer relationship period of the related customer.  Deferred commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred commission expense, and the remaining portion is recorded as long-term deferred commission expense. Deferred commission expense during the three months ended March 31, 2018 increased by $4.8 million as a result of deferring incremental costs of obtaining a contract of $9.4 million and was offset by amortization of $4.6 million during the same period.

Partner Commissions

The Company pays its partners a commission based on the online software product sales price for sales to end-customers. The classification of the commission paid on the Company’s consolidated statements of operations depends on who purchases the online software product. In instances where the end-customer purchases the online software product from the Company, the Company is the principal and it records the commission paid to the partner as sales and marketing expense. When the partner purchases the online software product directly from the Company, the Company is the agent and it nets the consideration paid to the partner against the associated revenue it recognizes, as in these instances the Company’s customer is the partner and the Company’s remaining obligation is to the partner. The Company does not believe that it receives a tangible benefit from the commission payment to the partner.

 

12


 

3. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), Employee Stock Purchase Plan (“ESPP”), and the Conversion Option of the 2022 Notes are considered to be potential common stock equivalents.

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2018

 

 

 

2017

 

Net loss

 

$

(15,448

)

 

$

(8,075

)

Weighted-average common shares outstanding — basic

 

 

37,832

 

 

 

36,205

 

Dilutive effect of share equivalents resulting from stock options, RSUs, ESPP and the Conversion Option of the 2022 Notes

 

 

 

 

 

 

Weighted-average common shares,

   outstanding — diluted

 

 

37,832

 

 

 

36,205

 

Net loss per share, basic and diluted

 

$

(0.41

)

 

$

(0.22

)

 

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding stock options, RSUs, ESPP, and Conversion Option of the 2022 Notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents.

 

 

As of March 31,

 

 

 

 

2018

 

 

 

2017

 

 

 

(in thousands)

 

Options to purchase common shares

 

 

2,142

 

 

 

2,561

 

RSUs

 

 

2,284

 

 

 

2,013

 

Conversation option of the 2022 Notes

 

 

383

 

 

 

 

ESPP

 

 

8

 

 

 

3

 

 

The Company expects to settle the principal amount of the 2022 Notes in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the Conversion Option on diluted net income per share, if applicable. The Conversion Option will have a dilutive impact on net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of the 2022 Notes of $94.77 per share.  During the three months ended March 31, 2018 the 2022 Notes did not meet the Conversion Option and are not convertible.

 

4. Fair Value of Financial Instruments

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at March 31, 2018 and December 31, 2017.

 

 

 

13


 

 

 

March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,727

 

 

$

 

 

$

 

 

$

4,727

 

Commercial paper

 

 

 

 

 

8,875

 

 

 

 

 

 

8,875

 

Corporate bonds

 

 

 

 

 

83,159

 

 

 

 

 

 

83,159

 

U.S. government agency obligations

 

 

 

 

 

2,991

 

 

 

 

 

 

2,991

 

U.S. Treasury securities

 

 

 

 

 

362,370

 

 

 

 

 

 

362,370

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

5,968

 

 

 

 

 

 

5,968

 

Total

 

$

4,727

 

 

$

463,363

 

 

$

 

 

$

468,090

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

12,845

 

 

$

 

 

$

 

 

$

12,845

 

Commercial paper

 

 

 

 

 

5,867

 

 

 

 

 

 

5,867

 

Corporate bonds

 

 

 

 

 

81,668

 

 

 

 

 

 

81,668

 

U.S. government agency obligations

 

 

 

 

 

3,987

 

 

 

 

 

 

3,987

 

U.S. Treasury securities

 

 

 

 

 

356,535

 

 

 

 

 

 

356,535

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

5,105

 

 

 

 

 

 

5,105

 

Total

 

$

12,845

 

 

$

453,162

 

 

$

 

 

$

466,007

 

 

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At March 31, 2018 and December 31, 2017, our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

 

As of March 31, 2018, the fair value of the 2022 Notes was $516.4 million.  The fair value was determined based

on the quoted price of the 2022 Notes in an inactive market on the last trading day of the reporting period and has been classified as

Level 2 within the fair value hierarchy.

 

For certain other financial instruments, including accounts receivable, accounts payable, capital leases and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

 

Strategic investments consist of non-controlling equity investments in privately held companies. The Company elected the measurement alternative for these investments without readily determinable fair values and for which the Company does not have the ability to exercise significant influence. These investments are accounted for under the cost method of accounting. Under the cost method of accounting, the non-marketable equity securities are carried at cost less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which is recorded within the statement of operations. The Company holds $3.7 million of strategic investments without readily determinable fair values at March 31, 2018 and $3.5 million of strategic investments without readily determinable fair values at December 31, 2017. These investments are included in other assets on the consolidated balance sheets. There have been no adjustments to the carrying value of strategic investments resulting from impairments or observable price changes.

14


 

The following tables summarize the composition of our short- and long-term investments at March 31, 2018 and December 31, 2017.

 

 

 

March 31, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

4,891

 

 

$

 

 

$

(6

)

 

$

4,885

 

Corporate bonds

 

 

83,648

 

 

 

 

 

 

(489

)

 

 

83,159

 

U.S. government agency obligations

 

 

3,000

 

 

 

 

 

 

(9

)

 

 

2,991

 

U.S. Treasury securities

 

 

312,752

 

 

 

 

 

 

(308

)

 

 

312,444

 

Total

 

$

404,291

 

 

$

 

 

$

(812

)

 

$

403,479

 

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

5,874

 

 

$

 

 

$

(7

)

 

$

5,867

 

Corporate bonds

 

 

81,947

 

 

 

 

 

 

(279

)

 

 

81,668

 

U.S. government agency obligations

 

 

4,000

 

 

 

 

 

 

(13

)

 

 

3,987

 

U.S. Treasury securities

 

 

356,671

 

 

 

8

 

 

 

(144

)

 

 

356,535

 

Total

 

$

448,492

 

 

$

8

 

 

$

(443

)

 

$

448,057

 

 

For all of our securities for which the amortized cost basis was greater than the fair value at March 31, 2018, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, the Company considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.

Contractual Maturities

The contractual maturities of short-term and long-term investments held at March 31, 2018 and December 31, 2017 are as follows:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Amortized

Cost Basis

 

 

Aggregate

Fair Value

 

 

Amortized

Cost Basis

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

 

(in thousands)

 

Due within one year

 

$

375,946

 

 

$

375,379

 

 

$

416,932

 

 

$

416,663

 

Due after 1 year through 2 years

 

 

28,345

 

 

 

28,100

 

 

 

31,560

 

 

 

31,394

 

Total

 

$

404,291

 

 

$

403,479

 

 

$

448,492

 

 

$

448,057

 

 

 

5. Restricted cash

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows for the three months ended March 31, 2018 and 2017.

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

December 31, 2017

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

154,031

 

 

$

69,786

 

 

$

87,680

 

Restricted cash

 

 

5,968

 

 

 

4,940

 

 

 

4,757

 

Restricted cash, included in other assets

 

 

 

 

 

 

 

 

347

 

Total cash, cash equivalents, and restricted cash

 

$

159,999

 

 

$

74,726

 

 

$

92,784

 

 

15


 

Restricted cash is comprised of certificates of deposit related to landlord guarantees for our leased facilities. These restricted cash balances have been excluded from our cash and cash equivalents balance on our consolidated balance sheets.

 

 

6. Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

Computer equipment and purchased software

 

$

5,457

 

 

$

4,571

 

Employee computer equipment

 

 

6,015

 

 

 

4,260

 

Furniture and fixtures

 

 

11,330

 

 

 

11,083

 

Office equipment

 

 

2,546

 

 

 

2,620

 

Leasehold improvements

 

 

38,097

 

 

 

33,446

 

Equipment under capital lease

 

 

3,450

 

 

 

3,450

 

Internal-use software

 

 

3,449

 

 

 

2,892

 

Construction in progress

 

 

2,771

 

 

 

3,198

 

Total property and equipment

 

 

73,115

 

 

 

65,520

 

Less accumulated depreciation and amortization

 

 

(25,381

)

 

 

(22,226

)

Property and equipment, net

 

$

47,734

 

 

$

43,294

 

 

Depreciation and amortization expense on property and equipment was $3.1 million for the three months ended March 31, 2018 and $1.9 million for the three months ended March 31, 2017.

 

 

7. Capitalized Software Development Costs

Capitalized software development costs, exclusive of those recorded within property and equipment, consisted of the following:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

Gross capitalized software development costs

 

$

36,305

 

 

$

33,360

 

Accumulated amortization

 

 

(26,420

)

 

 

(24,600

)

Capitalized software development costs, net

 

$

9,885

 

 

$

8,760

 

 

Capitalized software development costs are amortized on a straight-line basis over their estimated useful life of two to three years.

 

The following table summarizes software development costs capitalized, stock-based compensation included in capitalized software development costs, and amortization of capitalized software development costs.

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Software development costs capitalized

 

$

2,945

 

 

$

1,902

 

Stock-based compensation included in capitalized software development costs

 

$

550

 

 

$

338

 

Amortization of capitalized software development costs

 

$

1,975

 

 

$

1,369

 

 

 

 

 

 

 

16


 

 

8. Intangible Assets

Intangible assets as of March 31, 2018 and December 31, 2017 consist of the following:

 

 

Weighted

Average

Remaining

Useful Life

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

(in thousands)

 

Acquired technology

 

16 Months

 

 

$

7,252

 

 

$

7,252

 

Acquired intellectual property

 

 

 

 

80

 

 

80

 

Accumulated amortization

 

 

 

 

 

 

(1,070

)

 

 

(1,020

)

Total

 

 

 

 

 

$

6,262

 

 

$

6,312

 

 

The estimated useful life of acquired technology and intellectual property is two to three years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Amortization expense related to intangible assets was $50 thousand in three months ended March 31, 2018, and $16 thousand in three months ended March 31, 2017. Amortization expense of acquired technology is included in cost of subscription revenue in the consolidated statements of operations. Amortization expense of acquired intellectual property is included in sales and marketing expense in the consolidated statements of operations.

Estimated future amortization expense for intangible assets, currently being amortized, as of March 31, 2018 is as follows:

Years ended

December 31,

 

Amortization

Expense

 

 

 

(in thousands)

 

2018

 

$

150

 

2019

 

 

112

 

Total

 

$

262

 

 

The estimated amortization does not include the amortization of the $6.0 million of acquired technology from the acquisition of Motion AI, Inc. as the intangible asset has not been placed into service as of March 31, 2018.  The Company expects that the acquired technology will be placed into service during 2018 and will be amortized through 2020.

 

 

9. 0.25% Convertible Senior Notes, Convertible Note Hedge and Warrant

 

In May 2017, the Company issued $350 million aggregate principal amount of 0.25% convertible senior notes due June 1, 2022 in a private offering and an additional $50 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (the “2022 Notes”).

The net carrying amount of the liability component of the 2022 Notes is as follows:

 

 

As of March 31, 2018

 

 

As of December 31, 2017

 

 

(in thousands)

 

Principal

$

400,000

 

 

$

400,000

 

Unamortized debt discount

 

(89,931

)

 

 

(94,498

)

Unamortized issuance costs

 

(6,714

)

 

 

(7,055

)

Net carrying amount

$

303,355

 

 

$

298,447

 

 

 

 

 

 

17


 

Interest expense related to the 2022 Notes is as follows:

 

 

Three Months Ended March 31,

 

 

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